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Monday June 24th, 2024

Sri Lanka tax-payers left guessing after latest tax upheaval

ECONOMYNEXT – Sri Lanka’s latest tax upheaval from the 2022 budget which has repeated a ‘super gains tax’ to penalize large firms and brought back a cascading turnover tax instead has left many tax payers guessing over their application.

Sri Lanka had to impose higher taxes to cover expenses after a steep cut in value added tax in 2019 without a sitting parliament de-stabilized state finances after the state was expanded from 17 percent of GDP to over 20 percent under an unusually statist ‘revenue based fiscal consolidation’ strategy.

Exporters are likely to face a non-recoverable turnover tax from the social security tax, unlike the earlier higher rate VAT which does not hurt external competitiveness. Price controlled industries like pharmaceuticals would also be squeezed.

Super gains tax ‘normalized

In the 2022 budget a ‘super gains tax’ where large companies are targeted with a windfall style tax was repeated retrospectively, normalizing an additional ‘regime uncertainty’ to the country’s policy framework which began in 2015, critics say.

Private firms and chambers had sought clarity from authority while some industry groups were engaged in intense lobbying to minimize the effects of some of the new taxes.

The 2022 super gains tax is to charge an additional 25 percent from large companies that earn more than 2.0 billion rupees in profits, where returns have to be filed by end November.

“The issues that are not clear at the moment is whether the tax will be applicable across the board for all companies irrespective of their tax rates,” Duminda Hulangamuwa Senior Partner and Head of Tax of Ernst and Young in Sri Lanka told representatives of the top German brands in Sri Lanka.

“There are companies with 14 percent (corporate income) tax rates, there are companies with 15 percent, there are companies with 18 percent and 24 percent.

“My presumption is that it will go across the board in order to get the 100 billion rupee revenue to all industries, unless there is a development to that.”

There are also companies which are exempt from taxes.

About 80 billion rupees extra had been spent on the Coronavirus vaccines which had benefitted everyone. However questions are being asked by Chambers and others why only a selected few are being made to pay and not everyone.

“That is a call the government has to make. I am ok with either, but that is what people are saying,” Hulangamuwa explained.

There was also no information if marginal relief would be given to companies in the borderline.

“For example someone at 2.0 billion and one would pay, and a person at 1999 would not pay,” Hulangamuwa said.

“So someone at 1999 would get away and someone at 2001 would pay. There is no marginal relief to a person becoming short of just one rupee.”

In larger business groups, companies get dividends. The dividends are taxed by the declaring company already. The profits are taxed and the dividends are taxed at 14 percent.

If the recipient company goes over 2.0 billion taxes will have to be paid again.

“I do not think those are issues that have been addressed yet,” Hulangamuwa said. “I think these are issues that have to be addressed by the government when enacting the law into implementation.

“Now the question is who wants to be in the billion rupee club?”

The Rule of Law

Companies who had earned two billion had already used them for re-investment for expansion based on existing law. Some have also paid dividends and bonuses to workers.

“So they do not have cash though the profits are there to pay the tax. So these are the questions that are coming up. There are no answers to be given at the moment. Some are being taken up by the Chambers etc, but the final solution I do not have as to how and what base the tax will be levied on.”

The lack stable laws bring in what economists call ‘regime uncertainty‘, undermining rule of law, which analysts have said is one of the three biggest drawbacks the country faces along with monetary instability and nationalism.

“Nothing distinguishes more clearly a free country from a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law,” explains economist Friedrich von Hayek, in his work The Road to Serfdom.

“Stripped of technicalities this means that government in all its actions is bound by rules fixed and announced beforehand – rules that make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.

“Thus, within the known rules of the game, the individual is free to pursue his personal ends, certain that the powers of government will not be used deliberately to frustrate his efforts.”

“Hence the familiar fact that the more the state ‘plans’, the more difficult planning becomes for the individual.”

The super gains tax was introduced by the ousted ‘Yahapalana administration’ which pushed up state spending through a 100 day program and it has now opened a pandora’s box of uncertainty for large companies. It was then promised to be one time.

An extra 3 percent tax was charged on banks calling it the financial VAT replacing a removed 3 percent Nation Building Tax.

“So they pay the NPB back as a VAT on financial services.”

Banks are likely to pay around 70 percent in taxes for the last financial year.

Changes to the VAT was only in respect to donations made to government.

In most European countries VAT was close to 20 percent and in Sri Lanka it has been brought down to 8 percent from an earlier 15 percent as part of the sudden tax changes in 2019.

However VAT is neutral for exporters and does not hurt export the global competitiveness of export industries or services.

Cascading NBT returns

In the budget for 2022 another new tax had been brought calling it the ‘social security contribution’ at 2.5 percent.

“This is similar to the Nation Building Tax that was abolished last year. It was a tax on turnover, and this will also be a tax on turnover, except that the rate is half a percent more.

He said clarity was being sought on the tax base and on exemptions.

“When a tax is introduced we find a lot of people lobbying for their industry,” he said. “It will directly after the bottom line. You do not keep 2.5 percent on bottom-line.

“The retailers, the distributors, low margin companies, bunkering and price controlled industries like pharmaceuticals they are unable to increase their prices because of the 2.5 percent.

“I believe the government will give relief to the industries that are at a low margin level.”

Analysts say cascading taxes will generally result in higher prices.

“The next of course is exporters,” he said. “They are screaming saying that 2.5 percent under current circumstance where margins are challenging, markets are challenging that they cannot afford to pay the 2.5 percent.

“So, all these matters had been discussed with relevant government officers – the Treasury especially. And I believe there will be some relief and these matters will be addressed as we go along.” (Colombo/Nov28/2021)

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Sri Lanka central bank appoints two Deputy Governors

ECONOMYNEXT – Sri Lanka’s central bank said Assistant Governors A A M Thassim and J P R Karunaratne were promoted to the post of Deputy Governor.

The full statement is reproduced below:

APPOINTMENT OF NEW DEPUTY GOVERNORS OF THE CENTRAL BANK OF SRI LANKA

In terms of the provisions in the Central Bank of Sri Lanka Act, No. 16 of 2023, Hon. Minister of Finance, as recommended by the Governing Board, has appointed Mr. A A M Thassim, Assistant Governor and Secretary to the Governing Board, and Mr. J P R Karunaratne, Assistant Governor, as Deputy Governors of the Central Bank of Sri Lanka with effect from 20.06.2024 and 24.06.2024, respectively.

Mr. A A M Thassim

Mr. A.A.M. Thassim has over 31 years of service at Central Bank of Sri Lanka (CBSL) in different capacities in the areas of Supervision and Regulation of Banking Institutions, International Operations, Communication, Payments and Settlements, Employees Provident Fund, Finance, Risk Management, Deposit Insurance, Security Services and Information Technology.

He has served as the Director of Bank Supervision (DBS), Director of International Operation (DIO) and Director of Communications (DCM) and has contributed towards strengthening the legal framework, governance, implementation the Basel 3 international guidelines for capital and liquidity and adoption of International Financial Reporting Standards (IFRS) 9 to the banking sector, thereby strengthening the resilience of the Financial Sector.

Further, as the DIO, Mr. Thassim was responsible for the investments and management of foreign reserves of the country and exchange rate management. Mr. Thassim has also gained experience and knowledge in the field of payment systems and was involved in the implementation of the Cheque Imaging and Truncation System. In addition, he has also served on several high-level internal committees including in the areas of monetary policy, financial system stability and international reserves.

Prior to the appointment as the Deputy Governor, Mr. Thassim held the position of Assistant Governor and was in charge of several key departments including the Bank Supervision Department. He also served as the Secretary to the Governing Board, Monetary Policy Board, Audit Committee, Board Risk Oversight Committee, Ethics Committee and Financial Sector Crisis Management Committee.

At present, Mr. Thassim is a board member of the Sri Lanka Export Credit Insurance Corporation and the Vice Chairman of the Institute of Bankers of Sri Lanka (IBSL). Further, he has also served as a board member of the Credit Information Bureau of Sri Lanka and LankaClear (Pvt) Ltd.,

Mr. Thassim is an Associate member of the Chartered Institute of Management Accountants (ACMA) United Kingdom and possesses a Masters in Business Administration (MBA) from the Postgraduate Institute of Management (PIM), University of Sri Jayewardenepura (USJ). He has also completed a programme on Gold Reserves Management from Hass School of Business, University of California, Berkeley, USA.

He is also an Alumni of Harvard University, USA having successfully completed the executive programme on Leaders in Development conducted by the John F. Kennedy School of Government.

Mr. J P R Karunaratne

Mr. J P R Karunaratne has over 33 years of service at the Central Bank of Sri Lanka in different capacities in the areas of supervision and regulation of Banks and Non-Bank financial institutions, Currency management, public debt, Secretariat, Finance, policy review and monitoring. He has served as the Director of Supervision of Non-Bank Financial Institutions (DSNBFI) and the Superintendent of Currency (SC) and has contributed towards strengthening the legal and regulatory framework in the Non-Bank Financial Institutions sector and has played a prominent role in the consolidation of the Non-Bank Financial Institutions sector. Prior to the appointment as a Deputy Governor, Mr. J P R Karunaratne held the position of Assistant Governor and was in-charge of the Department of Supervision of Non-Bank Financial Institutions, Finance Department and the Facilities Management Department.

As an Assistant Governor Mr. Karunaratne has previously overseen several other departments namely, Macroprudential Surveillance, Resolution and Enforcement, Foreign Exchange, Currency, Regional Development, Legal and Compliance, Risk Management, Center for Banking Studies, Security Services and Staff Services Management.

He has also served as the Secretary to the Monetary Board, Secretary to the Board Risk Oversight Committee, Monetary Board Advisory Audit Committee and the Ethics Committee. Further, He was on release to the Ministry of Defence, where he served as a Financial Advisor. He was also appointed as the Chief Operating Officer for the Secretariat of Committee of Chartered Accountants appointed by the Supreme Court in 2009.

He has served as the Chairman of the Sri Lanka Accounting and Auditing Standards Monitoring Board and has been a Council Member of the Certified Management Accountants (CMA) of Sri Lanka. Mr. Karunaratne was awarded the CMA Sri Lanka Business Excellence Award at the CMA Sri Lanka National Management Accounting Conference 2023 in recognition of his service to the profession. He has also received “Long Service Award” of the IBSL in 2019 in recognition of his long career and contribution as a resource person at IBSL.

He was the Project Team Leader of the South East Asian Central Banks (SEACEN) Malaysia, research project on “Implementation of Basel III Challenges and Opportunities in SEACEN Countries” and SEACEN published the research in 2013. He serves as a member of several internal and external committees at present.

Mr. Karunaratne holds a Master of Commerce Degree in Finance from the University of New South Wales, Australia and a Postgraduate Diploma in Applied Statistics and a Bachelor of Science (Physical Science) Degree with a First class from the University of Colombo. He is a Fellow Member of the Chartered Institute of Management Accountants (CIMA), UK and a Chartered Global Management Accountant (CGMA). Further, he is an Associate Member of the CMA Sri Lanka.

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Sri Lanka opposition questions claims that IMF housing tax is only for kulaks

ECONOMYNEXT – Sri Lanka’s opposition has questioned claims made by government spokesmen that a tax on housing proposed in an International Monetary Fund deal is only limited to rich people but if as promised by President one house is exempt, it is welcome, legislator Harsha de Silva said.

Sri Lanka President Ranil Wickremesinghe made a promise in parliament that the first house of a citizen will be excluded from the property tax.

Related Sri Lanka to exempt one house from imputed rent wealth tax: President

But opposition legislator Harsha de Silva pointed out that the IMF program documents clearly says taxes will be levied on owner occupied houses on ‘imputed taxes’, not second houses.

Under current inland revenue laws, actual rent income from a second house is already captured as part of taxable income.

The IMF document mentions a threshold value from which taxes will be exempt but not that a whole owner-occupied primary residence will be exempt.

“The tax is imposed on the income of individuals (rather than real property itself) and thus raises central government revenue in accordance with the constitution,” IMF staff said in their report.

“A similar tax was previously included in the Inland Revenue Act. No. 10 of 2006.

“Under this regime, primary residences were exempt and the assessed values for rating purposes were used to determine the base.

“Given the broad exemption and the use of outdated and downward biased annual values, the tax generated hardly any revenue.”

Meanwhile Sri Lanka has promised to impose the housing tax from April 01, 2025.

“…[W]e will introduce an imputed rental income tax on owner-occupied and vacant residential properties before the beginning of the tax year on April 1st, 2025,” the memorandum of economic policies agreed with the IMF said.

“An exemption threshold and a graduated tax rate schedule would make this tax highly progressive.

“The full revenue yield from this tax is estimated at 0.4 percent and would materialize in 2026 (with a partial yield of 0.15 percent in 2025).

“This yield would still fall short by 1 percent of GDP relative to the expected yield of 1.2 percent of GDP from the property tax envisaged for 2025 onwards.”

Presidential Undertaking

“Whatever the President said the IMF agreement says owner occupied house,” De Silva told in parliament.

“It is not the second house that is mentioned in the agreement.

“But there is one thing. I am happy as Samagi Jana Balawegaya, that we have been able to save the middle class in society from a massive tax that was to be imposed.”

In Sri Lanka there is a belief that the most productive citizens are fair game for excessive or expropriationary taxation, just like kulaks were targeted in the Soviet Union for actual expropriation, critics say.

Wealth taxes have had disastrous effects on some US cities like Baltimore, leading to falling populations and dilapidated houses.

Sri Lanka is currently facing a brain drain due to high income tax after on top of depreciation from severe monetary debasement from a flexible exchange rate, which is neither a hard peg nor a clean float.

Sri Lanka has imposed a wide range of taxes on the people to maintain a bloated state, after inflationists engaged in extreme macro-economic policy (tax and rate cuts) glorified in Saltwater-Cambridge doctrine to boost growth, throwing classical economic principles and monetary stability to the winds and driving the country into external default.

The IMF itself gave technical assistance the central bank to calculate potential output inviting the agency to cut rates to close the perceived econometric ‘output gap’.

In the run up to the default, rate cuts triggered multiple external crises, leading to output shocks as stabilization programs were implemented.

Macro-economic Policy

Macro-economic policy as known now was devised by Cambridge academic J M Keynes in the wake of the Great Depression triggered by the Federal Reserve after it invented open market operations and policy rates in the 1920s and also popularized by Harvard academic Alvin Hansen among others.

Macro-economic policy started to de-stabilize countries in peacetime in the interwar years and after World War II it led to the collapse of the Bretton Woods system.

The Great Depression was also a peacetime collapse of what was later known as the roaring 20s’ monetary bubble.

“They have blithely ignored the warnings of economists,” classical economist Ludwig von Mises wrote of European nations which got into trouble from rate cuts and Keynesian stimulus, which brought currency depreciation and protectionism in its wake from the 1930s.

“They have erected trade barriers, they have fostered credit expansion and an easy money policy, they have taken recourse to price control, to minimum wage rates, and to subsidies.

“They have transformed taxation into confiscation and expropriation; they have proclaimed heedless spending as the best method to increase wealth and welfare.

“But when the inevitable consequences of such policies, long before predicted by the economists, became more and more obvious, public opinion did not place the blame on these cherished policies…”

Who….?

In Sri Lanka however there is some understanding of the role played by macro-economists in the most recent crisis.

There are rumblings of unhappiness about ‘central bank independence’ given to an agency to create 5 to 7 percent inflation and currency debasement under a flexible exchange rate and its constitutional status relating to parliamentary control of public finances.

Sri Lanka’s central bank’s current flexible inflation targeting (inflation targeting without a floating rate) regime as well as its 1980s money supply targeting without floating rate has busted the national currency for decades and made it impossible to run budgets, made it difficult for people build houses which are now to be taxed, and also for millions to live and work in the country of their birth.

Fiscal metrics deteriorate each time rate cuts drive the country into currency crises and new taxes are brought in stabilization programs, ousting reformist governments and leading to policy reversals.

Sri Lanka’s citizens have suffered for decades from the privilege given to a few macroeconomists to print money to cut rates with inflationary open market operations and trigger forex shortages.

Related How Sri Lanka’s elections are decided by macro-economists and the IMF: Bellwether

Critics have pointed out that since 1954 in particular, central bank rates cuts which drive the country into external crises and the stabilization programs that follow, have been the main determinant of elections in the country and election of fringe political parties. (Colombo/June13/2024)

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India supports Sri Lanka Coast Guard to boost maritime security

ECONOMYNEXT – India has given 1.2 million US dollars’ worth spare parts to Sri Lanka’s Coast Guard to be used in a vessel also gifted to the Indian Ocean Island on an earlier occasion, the Indian High Commission in Colombo said.

“Handing over of the large consignment of spares symbolizes India’s commitment to support capability building towards addressing the shared challenges of Maritime Security in the region,” the Indian High Commission said

The spare parts were brought to Sri Lanka on the Indian Coast Guard Ship Sachet, an offshore patrol vessel that was on a two-day visit to the island.

The spares were formally handed over to the Sri Lanka Coast Guard Ship Suraksha which was gifted to Sri Lanka in October 2017 by India.

India has gifted spare parts for the ship in June 2021 and April 2022 and also provided assistance in refilling of Halon cylinders in January 2024. (Colombo/June23/2024)

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